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Bull of the Day

RockTenn (RKT - Analyst Report) delivered its third consecutive positive earnings surprise on April 23, and earnings estimates have been soaring ever since.

This has sent the stock to a Zacks Rank #1 (Strong Buy).

Based on current consensus estimates, analysts project 43% EPS growth this year and 39% growth next year. Despite this stellar growth, shares trade at just 12.5x forward earnings.

RockTenn manufactures corrugated and consumer packaging. It was founded in 1936 and has a market cap of $7.0 billion.

Big Second Quarter Beat

RockTenn reported better-than-expected second quarter results for the second quarter of its fiscal 2013 on April 23. Adjusted earnings per share jumped 16% to $1.12, beating the Zacks Consensus Estimate by 10 cents. It was the company's third consecutive positive earnings surprise.

Net sales increased 2% to $2.325 billion, driven by a 7% increase in the Corrugated Packaging segment.

Turning 2% sales growth into 16% EPS growth means one thing: expanding profit margins. The gross margin expanded 80 basis points to 16.6% in the quarter, while total segment income increased 60 basis points to 7.5%. Meanwhile, interest expense declined 16%, which drove the net profit margin higher.

Estimates Soaring

Earnings estimates have soared since RockTenn's big second quarter beat, which has sent the stock to a Zacks Rank #1 (Strong Buy).

The Zacks Consensus Estimate for 2013 is now $6.40, up from $5.88 just 60 days ago, and representing 43% EPS growth over 2012. The 2014 consensus has risen from $7.75 to $8.93 over the same period, which corresponds with 39% EPS growth.

While people think the paper industry is dying, the 'Paper & Related Products' industry ranks in the top 20% of industries according to the Zacks Industry Rank.

Former Dunder Mifflin manager Michael Scott would be proud.

Reasonable Valuation

The valuation picture look very reasonable for RockTenn. Shares trade at 12.5x 12-month forward earnings, which is in-line with its 10-year median.

RockTenn also trades at just 6.5x cash flow, well below the industry median of 10.0x.

The Bottom Line

With rising earnings estimates, strong growth projections and reasonable valuation, RockTenn offers investors a lot to like.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor service.

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